buy low sell high

Rule #2

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We often talk about our three fundamental principles of investing. Rule #2 is ‘Buy the best bargains.’ This is our intent, but we must act on what we know, which is incomplete. Our crystal ball does not actually work; we do not know the future. No guarantees.

The best bargain is likely to be unpopular – or else it might not be a bargain. We often buy into sectors that are down sharply from much higher levels, years before. The crowd is almost never rushing into shares that have declined 50 or 80% over a period of years.

This matches up nicely with our contrarian philosophy, doing our own thinking, going our own way. In fact, we believe that profit potential lives in the gap between the consensus expectation and the unfolding reality. We think there is an edge in finding a lonely, but correct, position.

There are different categories of bargains. The best bargain might be a cyclical investment at the low point in its cycle – homebuilders in recession, for example. Or a wonderful, durable blue chip company available at a temporarily low price because of some short-term issue. Or a deeply discounted bond in a stressed company that we figure is trading below liquidation value. No guarantees, as we said!

Our approach is not the only one. Some believe in buying only when an investment is already in a clear up-trend. Others want to own the things that are on the magazine covers, the ones everyone is talking about. For better or worse, we do our best to stick to our convictions. (And sometimes they are better, and sometimes they are worse.)

The value style, our philosophy, is right for us. Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stocks Have No Memory

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Clients sometimes bring up their own history with a particular investment in
trying to assess it. We sometimes hear things like this:

• “It’s done nothing but go down since we bought it.”
• “This is the most boring stock ever! It just lays there.”
• “At what point do you give up on waiting for it to turn around?”

As investors, our challenge is to form an opinion about the future value of prospective investments. Broad economic trends, industry developments, and company evolution may go into the mix. Reading annual and quarterly reports, checking our research sources, and looking at pertinent news are part of our routine. We frequently have to do some arithmetic, too.

Notice something missing from our recipe? Investment price performance does not go into the stew. Track record is not a factor for us personally. If you believe in buying low, you sometimes buy things with terrible recent performance. Conversely, some of the best track records in history belong to bubbles at their peak.

We aren’t saying our approach is the right approach. There is a whole school of thought that says you should only invest in things that are already going up—trend followers. But our approach is our approach, and we are unlikely to change.

Market values depend on the consensus opinion of the rest of the world. As contrarians, we look for potential gaps between the consensus and how we believe the future may unfold. No guarantees, of course—but we aren’t going to base investment decisions on a consensus that may be flawed.

Your stocks do not know how much you paid for them, or when you purchased them. We look at companies, not stocks—and make decisions in line with what we see. Opinions change, the consensus shifts, and we wait. Sometimes we look out of step for a time, perhaps years. That’s part of being contrarian.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

Stock investing involves risk including loss of principal.

Buy Low, Sell High

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If you watch a lot of sports journalism, sooner or later you will see someone deliver some variation on this nugget of wisdom: “If we want to win, we just have to score more points than the other team.”

In investing terms, the equivalent is “If we want to make money, we just have to buy low and sell high.” This is just math: if you sell something at a higher price than what you paid for it, you make a profit.

The “sell high” part is usually easy for most people to grasp. Sometimes someone in a hot rally may get wrapped up in watching their gains go up and up and forget to cash out before things inevitably come crashing back down. But generally taking profits is fun and comes naturally to people.

It is the “buy low” part of the equation that people tend to struggle with more. Something in the news for being popular and making money is probably not trading at a low price. Buying low often means a metaphorical dumpster dive to find the unwanted dregs of the market. It is often not pleasant or easy to put your money in something that has a reputation as an unattractive investment. But if you want to buy low, that is where you frequently need to go.

The upshot is that this makes it a lot easier to get excited about a down market. It feels good to participate in a rising market, but it can be difficult to find spots to buy in when markets are up. For a value investor, market selloffs may lead to buying opportunities.

Clients, many of you already know what we are talking about. We are in business with you for a reason—we think you are the best clients in the world. We know it is not always easy to make disciplined investing decisions. But we think you have what it takes.

If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Why Not Just Pull Back?

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The market has been rough lately! Seems like account values are shrinking month by month. In times like these, clients sometimes ask why we don’t just pull back when the market starts going down. It is a fair question.
We are thinking about a number of things in formulating investment strategy and tactics:

1. The average decline in the course of a calendar year in the major market averages is about 13%1. Basically, the market is always going down—and up.

2. A wag once noted that the market has predicted nine of the last five recessions. In other words, it may decline 10 or 20% without signifying anything about the health of the economy.

3. The times when it seems to make the most sense to sell out often turn out to be good times to be invested.

In short, the ups and downs are part of investing. We each face a choice between stability of values, and long term investment returns. There is no way to get both of these things on all of our money, although we may have some of each.

It is important to know where our money will come from, the funds we need in our pocket. For investors, it is also important to know our long-term portfolios will go up and down.

We mentioned above that the average stock market decline in the course of a year is 13%1. Let’s be clear about what that means: a $13,000 drop on a $100,000 portfolio; $65,000 on half a million; $130,000 on $1 million.

Here’s some solace: by the time you notice we’ve been skewered, we are closer to recovery than when the decline began. One year out of four, on average, the market (measured by the S&P 500) declines. Think about it—three years out of four, on average, it has gone up.

We don’t pull back because we do not want to miss the rebound. Our experience has been that we can live with the ups and downs. It isn’t always easy, but our experience has been that it works out over time.

Clients, if you would like to talk about this or anything else, please email us or call.

Notes and References

1. Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved November 5th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing, including stocks, involves risk including loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

The Giants Who Came Before Us

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 The work of Roger Babson contains countless worthwhile nuggets. He was a Wall Street pioneer a century ago, creator of the first investment research service, and philanthropist of note. A keen observer of business, the markets and the economy, and an original thinker, his words ring true today.

We see applications to the world of investing. For example:

“Experience has taught me that there is one chief reason why some people succeed and others fail. The difference is not one of knowing, but of doing. So far as success can be reduced to a formula, it consists of this: doing what you know you should do.

Thoughtful people understand the sentiment behind the old saying, ‘buy low, sell high.’ It has become a cliché. Yet in tumultuous and uncertain times when pessimism rules and stock prices have fallen, many people have trouble with step one: buying low. It turns out to be very difficult in practice.

We’ve also had conversations in the tough times with people who say “I know selling out now is the wrong thing to do, but that is what I want to do.” Clearly, this is a case of knowing what you should do—and doing the opposite! We illustrated how costly that can be here.

Without knowing Babson’s Rule, we have spent many years working to find or train investment clients who would do what they know they should do. You, our clients, are the best. We believe our efforts have been good for you-–and for us.

We will keep on working to find good opportunities, avoid threats where we can, and cultivate effective attitudes about investing—helping you do what you know you should do. If you would like to discuss your situation in detail, please write or call.


Securities offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

When Dark Clouds Fill the Sky

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Warren Buffett’s latest shareholder letter contained a remarkable paragraph:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

Long-time clients saw how this worked in the recovery from the 2009 crisis low point, and the post-9/11 lows in 2002. You are a remarkable group: when others panicked and sold out, many of you stayed the course. There is no guarantee, of course, that history will repeat, or that past performance indicates future outcomes.

Like great chess players, we need to be thinking many moves ahead. In our opinion, the economy in the US and around the globe is pretty good. We do not buy the whole stock market, we pick our spots. And we are excited about those spots.

But we do need to be steeled to both occasional market corrections of up to 10%, and the deeper declines that occur from time to time. They cannot be reliably predicted. What is in our control, however, is how we react. Do we sell out at low points, or get in position for a possible recovery? We are taking steps that may mitigate a general market decline—no guarantees, of course.

We are a little more prone to keep a little cash in reserve, to diversify into lower-priced markets, to continue to prune holdings that may be extended and add names we believe to be bargains. Most of our holdings are not sitting at all-time highs, although overall market averages are–the S&P 500 for example reached a new high as recently as March 1st1. You can read about our current themes here.

In the very best case, markets and our account values fluctuate. This is the tradeoff we accept in order to seek the returns we need to pursue our goals.

We have a great partnership with you, our amazing group of clients. You understand living with volatility can lead to long term rewards. We think we know what to do, whether the skies are blue or the dark clouds have gathered. If you have questions or comments, please write or call.

1Market data from Standard & Poor’s


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Things Warren Buffett Never Said

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Warren Buffett may be the most famous investor in the world. The annual meeting of his company is known as ‘Woodstock for Capitalists,’ and is attended by 40,000 people. Countless articles, essays, and books have been written (including by us) about the things he has said.

As far as we know, nobody has ever written anything about things Buffett NEVER said. But here are our top three things Buffett never said:

1. “The stock went down, so I sold it.” Buffett knows the market goes up and down. He studies companies, not stock ticker symbols. When the fundamentals are in place, he buys. Then he holds. Then he holds some more. If the price declines, he typically buys more. This is what ‘buy low, sell high’ is all about.

2. “I’m waiting to invest until we get more economic data to clear up the uncertainty.” In his seven decades of investing, Buffett has noticed that uncertainty is always with us. He reads and studies ceaselessly, and when he finds something to buy, he buys it. Frequently, this turns out to be when the price is depressed because of temporary factors. Others are paralyzed by uncertainty when Buffett is taking action.

3. “A lot depends on what the Federal Reserve does next month.” Buffett has run his company for more than five decades, while seven different people held the chairmanship of the Federal Reserve Board, through innumerable cycles of Federal Reserve tightening and loosening. He can tell you what he paid for his stake in Coca Cola and when it was purchased. He probably cannot say what the Federal Reserve did at the meeting before, or the meeting after, the transaction. Why? Because it doesn’t matter in the long run.

Warren Buffett does not wear a halo. He is a human being and that means he makes mistakes. But he has made more money investing than any other human being on the planet. We think it pays to listen to the things that he has said. But there may be even more value in understanding the things he never said.

If you would like to discuss these concepts or your specific circumstances at greater length, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal.